Will Comerica (CMA) Stock Go Up Further Post-Q3 Earnings?

Comerica’s second-quarter 2016 earnings beat the Zacks Consensus Estimate and improved year over year as well. Results were primarily aided by higher revenues, partially offset by increased expenses and provisions. Concurrent with its second-quarter earnings release, the company announced the implementation of its strategic initiative ("GEAR Up"), aimed at improving efficiency and revenues.

Interestingly, Comerica delivered positive earnings surprises in three of the trailing four quarters with an average earnings beat of 1.1%. Regarding the stock’s performance, Comerica has gained more than 10% over the last three months.

Will the upcoming earnings release give a further boost to Comerica’s stock? This majorly depends whether the firm is able to post a beat in the third quarter. Notably, our quantitative model also doesn’t point to an earnings beat. Here’s why:

Comerica doesn’t have the right combination of the two key ingredients – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least 2 (Buy) or 3 (Hold) – for increasing chances of an earnings beat.

Zacks ESP: The Earnings ESP for Comerica is 0.00%. This is because both the Most Accurate Estimate and the Zacks Consensus Estimate stand at 79 cents.

Zacks Rank: Comerica’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

Factors to Influence Q3 Results

Support from Fee Income Strength: Non-interest income might get a lift owing to Comerica’s several revenues initiatives, including enhancing product offerings. Further, the quarter might exhibit higher card fees and fiduciary income as the company remains focused on cross-sell opportunities.

Muted Loan Growth to Keep Net Interest Income Under Pressure: According to recent data from the Federal Reserve, commercial and industrial loans across the industry were flat during the quarter compared with second-quarter 2016. This may have kept the overall loan growth subdued. As steady loan growth was one of the major ways to offset margin pressure for several banks, including Comerica, in the last few quarters, third-quarter results might reflect considerable pressure on net interest income.

Slight Benefit from Increased 1-month LIBOR: The recent spike in LIBOR – a global benchmark for dollar lending – is set to benefit banks with huge amount of commercial and industrial (C&I) loans as most of these loans are tied to one-and three-month LIBOR. The funding is usually from deposits, the costs of which are not tied to LIBOR. Notably, earnings of Comerica which have around 55% C&I loan concentration of total loans, might get a lift to some extent.

Continued Pressure on Net Interest Margin (NIM): The persistent low rate environment has taken a toll on the bank’s margins. As the Fed did not take any step in raising the interest rates further, the company is not likely to record improvement in its NIM in the quarter.

Cost Saving Initiatives May Ease Expense Burden: Expenses might trend upward in the upcoming release due to restructuring costs and the increase in FDIC surcharge that went effective in third-quarter 2016. However, cost pressure should be offset to some extent given the company’s GEAR Up expense savings initiatives.

Reduced Energy Allowances: The credit performance of Comerica’s energy portfolio, representing around 5% of total loans, improved during second-quarter 2016. Management remains cautious and believes that the company is adequately reserved with reserve allocation of over 8% of energy loans as of Jun 30, 2016. We believe, given the rebound in oil prices that hit rock bottom in February, the allowances tied with energy portfolio should not be significant.

Activities of Comerica during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained unchanged at 79 cents per share over the last seven days. Notably, the estimated figure represents a year-over-year growth of 6%.

Stocks That Warrant a Look

Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.

Raymond James Financial, Inc. RJF has an Earnings ESP of +2.04% and carries a Zacks Rank #2. The company is slated to release results on Oct 26.

Lazard Ltd. LAZ has an Earnings ESP of +3.90% and carries a Zacks Rank #2. It is scheduled to report results on Oct 27.

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